Archer Daniels Midland Inc.'s ethanol business faces a stiff challenge from a well-oiled new rival.
Valero Energy Corp., one of the nation's largest oil refiners, made a splashy entrance into ethanol last year, buying 10 shuttered plants.
The San Antonio company outbid ADM CEO Patricia Woertz for several plants and will compete with ADM for more as the fragmented ethanol industry consolidates. But Valero represents a competitive threat to ADM beyond the auction block.
As an oil refiner, Valero can blend the ethanol it produces with its own gasoline or sell it to other refiners, depending on prices. Ethanol prices lately have been depressed  thus, the plant auctions  and Valero's plans to reopen its newly acquired factories likely will push prices lower by adding to the industry's capacity glut.
That's bad news for Decatur-based ADM: Poor ethanol results have dragged down overall earnings at the $69-billion-revenue agriculture giant. And Ms. Woertz has bet heavily on ethanol rebounding  the company recently opened a large plant, and another is slated to open this year.
"Biofuels play a huge role for ADM," says Ian Horowitz, an analyst at Rafferty Capital Markets LLC in New York.

Archer Daniels Midland Inc.'s ethanol business faces a stiff challenge from a well-oiled new rival.

Archer Daniels Midland Inc.'s ethanol business faces a stiff challenge from a well-oiled new rival.

Valero Energy Corp., one of the nation's largest oil refiners, made a splashy entrance into ethanol last year, buying 10 shuttered plants.

The San Antonio company outbid ADM CEO Patricia Woertz for several plants and will compete with ADM for more as the fragmented ethanol industry consolidates. But Valero represents a competitive threat to ADM beyond the auction block.

As an oil refiner, Valero can blend the ethanol it produces with its own gasoline or sell it to other refiners, depending on prices. Ethanol prices lately have been depressed  thus, the plant auctions  and Valero's plans to reopen its newly acquired factories likely will push prices lower by adding to the industry's capacity glut.

That's bad news for Decatur-based ADM: Poor ethanol results have dragged down overall earnings at the $69-billion-revenue agriculture giant. And Ms. Woertz has bet heavily on ethanol rebounding  the company recently opened a large plant, and another is slated to open this year.

"Biofuels play a huge role for ADM," says Ian Horowitz, an analyst at Rafferty Capital Markets LLC in New York. "Now they are competing against a more diversified and stable company with Valero, and they may lose some of their dominance in the ethanol market."

With about 1.4 billion gallons of production capacity  and another 275 million gallons to come online this year when the new plant opens in Iowa  ADM owns more ethanol capacity than any other player in the industry, according to data from the Renewable Fuels Assn. in Washington, D.C.

But Valero, with $119 billion in revenue, is closing in fast. The company made its first ethanol play in March, snapping up seven bankrupt factories for about $475 million, outbidding ADM in the process. Valero then bought another three plants in December for $272 million, raising its total production capacity to about 1.1 billion gallons a year.

Another player is Poet LLC, a private, $4-billion South Dakota firm that owns one plant and has a partial interest in 25 others with a combined capacity of 1.5 billion gallons. But Valero is the first company of ADM's size and scope to compete with it in ethanol.

Valero's recent acquisition tear darkens the outlook for ethanol prices  and for ADM, Robert Moskow, an analyst at Credit Suisse in New York, wrote last month in a note to investors.

He predicted Valero's reopening of ethanol plants and ADM's new facilities could lead to oversupply in the coming year, which will drive down prices and profits.

"Ethanol margins are good now, but they may come under pressure again," Mr. Moskow wrote. "Ethanol remains a cloud over the ADM story."

ADM doesn't break out its ethanol results but includes them in its bioproducts division, which posted a $315-million loss on sales of $4 billion for the fiscal year ended June 30. That was a reversal of the $404-million profit the previous year. The division lost $6 million in the most recent quarter ended Sept. 30.

Ms. Woertz, a former oil executive, has reiterated her faith in ethanol. She told analysts in November that ADM's size and scale give it an advantage.

"The ethanol market will remain a competitive market, with opportunities for a range of participants," an ADM spokesman says in a statement. "Our track record of on-time deliveries and assurance of supply have made us a preferred supplier."

TURNING A PROFIT

Even as ADM's bioproducts division lost money in the most recent quarter, Valero's ethanol operation turned a profit. ADM said its ethanol business was profitable and other parts of the division led to the decline, but the company would not provide figures.

A Valero spokesman says company executives didn't expect to turn a profit on the plants so soon. While Valero has suffered losses in its main refining business, "ethanol has been a bright spot for the company," the spokesman says.

Valero made the ethanol purchases despite the downturn in refining, and the spokesman says the company doesn't rule out more deals. He notes that Valero, founded in 1980, has a history of growing by buying assets at depressed prices.

Brian Youngberg, an analyst at Edward Jones in St. Louis, says he expects Valero to snap up several more plants because the company still uses more ethanol than it can produce for its refining business.

"Valero's purchases have been well received on Wall Street," Mr. Youngberg says. "It's a strategic move, and they have been able to buy on the cheap."